Accounting _Discussion post 2

Return to thinking about your company from week 1.--.> ADIDAS

Does it make or sell something that is produced?  For instance, a manufacturing company, an oil and gas company, or even a consulting services company all fit.

If so you get to use that company again...otherwise you have to pick another company.  One that has either cost of goods or cost of sales on its' published financials.

For your company look in the financial statements to find the notes on how they cost inventory.

To do this you need to look in the annual (10-K) or sometimes 10-Q(quarterly) in its' entirety.   Look for the management discussion and the heading "Critical accounting policies" (or key accounting policies)...Usually fairly close to the top there is something related to "Valuation of inventories

For instance, I found this statement for Xilinx

"Inventories are stated at the lower of actual cost (determined using the first-in, first-out method) or market (estimated net realizable value). The valuation of inventory requires us to estimate excess or obsolete inventory as well as inventory that is not of salable quality. We review and set standard costs quarterly to approximate current actual manufacturing costs. Our manufacturing overhead standards for product costs are calculated assuming full absorption of actual spending over actual volumes, adjusted for excess capacity. Given the cyclicality of the market, the obsolescence of technology and product lifecycles, we write down inventory based on forecasted demand and technological obsolescence."

You should also look at the Notes after the financials. Look at Note 2, (usually) Summary of Significant Accounting Policies and Concentrations of Risk.

Under inventories I see

"The Company reviews and sets standard costs quarterly to approximate current actual manufacturing costs. The Company’s manufacturing overhead standards for product costs are calculated assuming full absorption of actual spending over actual volumes, adjusted for excess capacity."

This basically is telling us that they set standards quarterly and are trying to emulate actual costs.  Manufacturing overhead is absorbed.

It doesn't tell us how the set the standard though.

So I looked up online to find information about my industry (semiconductors) and found

"Most often, product is valued using a yielded standard cost model. At each stage of production, this model takes the product value for the input to the stage, adds the cost of product and/or service at that stage and divides the sum by a planned (standard) yield for that stage. For example, if a chip is going through the "packaged test" step, the product's value going into test might be $4.50, the testing itself might cost $0.50 and the expected yield might be 80 percent. In this example, the yielded standard cost model values the product coming out of that stage at $6.00." (retrieved on June 25,2013  from http://www.gsaglobal.org/forum/2009/4/articles_scarborough.asp

In other words, it is a standard cost based on the processes that each chip is put through.

Try to see if you can find out similar information for your company or industry.

EXAMPLE !

This is Under Armour’s statement on how they cost their inventory on page 43.

“Inventory Valuation and Reserves”

“We value our inventory at standard cost which approximates landed cost, using the first-in, first-out method of cost determination. Market value is estimated based upon assumptions made about future demand and retail market conditions. If we determine that the estimated market value of our inventory is less than the carrying value of such inventory, we record a charge to cost of goods sold to reflect the lower of cost or market. If actual market conditions are less favorable than those we projected, further adjustments may be required that would increase the cost of goods sold in the period in which such a determination was made.”

Landed cost is the cost of the materials used to produce the inventory along with the costs to ship it to the stores. Under Armour’s changes how they value their inventory depending on how they forecast future demand. For example if Under Armour projected demand to fall, then they might value their inventory lower, then if they had projected demand to rise.

Under “Notes to the Audited Consolidated Financial Statements” and “Summary of Significant Accounting Policies” on page 56 Under Armour includes some more information on their inventories.

“Inventories”

“Inventories consist primarily of finished goods. Costs of finished goods inventories include all costs incurred to bring inventory to its current condition, including inbound freight, duties and other costs. The Company values its inventory at standard cost which approximates landed cost, using the first-in, first-out method of cost determination. Market value is estimated based upon assumptions made about future demand and retail market conditions. If the Company determines that the estimated market value of its inventory is less than the carrying value of such inventory, it records a charge to cost of goods sold to reflect the lower of cost or market. If actual market conditions are less favorable than those projected by the Company, further adjustments may be required that would increase the cost of goods sold in the period in which such a determination was made.”

However, most of this information was already included in the “Inventory Valuation and Reserves” section. The only new information is the first two sentences. They basically say that cost of goods sold not only includes the costs to produce the good, but also all costs that are incurred to ship the good to wherever it needs to go. In Under Armour’s case this is either directly to the consumer for online sales, or to its brick and mortar stores.

http://files.shareholder.com/downloads/UARM/1304631100x0x816471/3BEBC664-8584-4F22-AC0B-844CB2949814/UA_2014_Annual_Report.PDF

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